The Central Bank has announced a range very significant changes to its controversial mortgage lending rules, which could make it much easier for first-time buyers to purchase a property.
Under the new Central Bank's new mortgage lending rules, first-time buyers will only be required to provide a 10% deposit when purchasing a property, regardless of the value.
Banks will be permitted to grant exceptions to the rules for up to 5% of first-time buyer loans.
The exception allowance for second-time and subsequent buyers has been increased to a maximum of 20%.
Previously, the exceptions allowance for all loans was 15%.
Before we look at what the changes mean for first-time buyers, let’s quickly recap on what the rules are and why they’ve been so controversial.
What are the Central Bank’s mortgage lending rules?
Introduced in February 2015 to prevent the Irish property market from overheating, the Central Bank's rules restrict the loan-to-income ratio for a prospective property buyer to three-and-a-half times their annual income.
So, if you earn €40,000 a year, you can buy a house with a maximum value of €140,000. If you’re buying with a partner who also earns €40,000, that amount doubles to €280,000 of course.
The second major mortgage lending rule relates to the loan-to-value ratios that lenders are permitted to offer. This refers to the percentage of the property’s value that you can borrow and how much of it you must pay for up front, in the form of a deposit.
Before today’s announcement, the rules stated that first-time buyers must provide 10% of the first €220,000 of a property’s value in the form of a deposit. After the €220,000 threshold, the deposit requirement went up to 20%.
So, to continue with our example of a couple looking to buy a house valued at €280,000; they must provide a deposit of 10% of the first €220,000 and 20% of the remaining €60,000. So, they would need to provide a total of €34,000 (€22,000+€12,000) up front.
And what about non-first-time buyers? Well, they all had to provide a 20% deposit to buy any home.
The rules also stated that lenders are allowed to provide exceptions to the rules for up to 15% of the value of their total loan book. With these exemptions in place, some borrowers could have made a purchase with a lower deposit or borrowed more than three-and-a-half times their income.
Why are the rules so controversial?
The rules have been blamed for rising house prices, soaring rents and even the traffic build-up on the M50.
House prices across the country increased by 7.3% in the year to September and the average price of a house in Dublin now stands at €383,000, according to the CSO. These high prices have left many prospective young buyers with no choice but to continue renting.
And this has forced rents up to an all-time high. In fact average nationwide rent is now €1,077.
These substantial increases have contributed to the average age of first-time buyers rising from 29 to 34 over the last 10 years, and to the surge in the number of people moving to out of the cities and in to more-affordable commuter towns.
What has been changed?
The issue of increasing housing and rental prices prompted the Central Bank to seek consultation from the public and other stakeholders on whether or not the rules should be changed.
And, as W.B. Yeats famously said, all is "changed, changed utterly”.
The Central Bank has announced that, from January 1st 2017, first-time buyers will only be required to provide a deposit of 10% for any property.
Additionally, 5% of the value of new lending to first-time buyers will be allowed above the 90% loan-to-value limit and 20% of the value of new lending to second-time and subsequent buyers will be allowed above the 80% loan-to-value limit.
Meanwhile, the three-and-a-half times ceiling on the loan-to-income ratio remains unchanged and the 20% minimum deposit requirement continues to apply to second-time and subsequent buyers.
What does this mean for first-time buyers?
As mentioned, the average price of a house in Dublin is now €383,000.
Before today’s announcement, a first-time buyer would have needed a deposit of €54,600 before even seeking approval for an average-price house in the nation's capital.
However, with the new 90% loan-to-value ratio for all property values, that same first-time buyer will only need a deposit of just €38,300 from January 1st.
So, in essence, today’s announcement has knocked €16,300 off the average deposit requirement for a first-time buyer shopping for a house in Dublin.
There will be much debate as to whether or not today’s changes will be ultimately good for the average first-time buyer in Ireland, with many speculating that looser rules will cause a further increase in house prices.
The Central Bank's mortgage lending rules may be "changed, changed utterly”, but it remains to be seen if another “terrible beauty is born” in Ireland’s notoriously-erratic property market.